Pure Cycle Corporation: Fiscal 2012 Second Quarter 10-Q
Reporting period: Quarter and six months ended February 29, 2012; statements are unaudited. Comparisons are with the corresponding 2011 periods. Pure Cycle provides wholesale water and wastewater services, primarily in the Denver metropolitan area.
Financial performance and position
| Metric | Three months ended Feb. 29, 2012 | Six months ended Feb. 29, 2012 |
|---|---|---|
| Revenue | $50,000, down 12% year over year | $117,500, down 6% |
| Gross margin | $10,700; approximately 21% | $31,100; approximately 26% |
| Operating loss | $628,000 | $1.26 million |
| Net loss | $1.36 million; $0.06 per share | $2.73 million; $0.11 per share |
Six-month operating cash use was $1.04 million, compared with $886,000 in the prior-year period. Investing activities provided $1.03 million, mainly from net sales and maturities of marketable securities; financing activities provided $31,000. Cash and cash equivalents were $90,000 and marketable securities were $3.51 million at period-end. Working capital was approximately $3.3 million.
Total assets were $114.9 million, including $106.3 million of net investments in water and water systems. Total liabilities were $70.2 million and shareholders’ equity was $44.7 million. The company reported no debt with contractual maturity dates, but had a $66.6 million Tap Participation Fee liability payable to HP A&M, with no scheduled maturity. The company also reported $1.21 million of participating interests in Export Water Supply.
Changes versus the prior comparable period
- For the six-month period, water revenue increased 7% to $66,000, while wastewater revenue fell 33% to $23,600. Total revenue declined as the wastewater customer shifted from a flat monthly charge to charges based on wastewater treated.
- Water deliveries decreased 5% for six months, partly because the largest customer closed dormitories amid budget cutbacks. Higher pumping and water acquisition costs, including demand related to oil and gas drilling and fracking, reduced water-service margins.
- Six-month gross margin declined to $31,000 from $49,600. Net loss narrowed to $2.73 million from $3.24 million, despite a slightly larger operating loss, reflecting oil-and-gas lease income and lower imputed Tap Participation Fee interest expense, among other items.
- General and administrative expense was essentially unchanged for six months at $1.18 million. Lower salary costs were largely offset by higher legal and professional fees.
- The company recorded no water or wastewater tap sales in either six-month period. Investing in land, water and water systems was $54,000, versus $6.82 million in the prior-year period, which included the Sky Ranch acquisition.
Outlook, risks and unusual items
- Management stated that available working capital was sufficient to fund operations for the next fiscal year. No specific revenue or earnings guidance was provided. The company said an effective shelf registration statement permitted potential additional stock sales of up to $4.45 million.
- The Tap Participation Fee was revalued in the first quarter: HP A&M elected to receive 20% of proceeds from the next 19,445 taps, rather than 10% from a larger number of taps. The reported liability rose to $66.6 million; its estimated gross future payments were $120.6 million, discounted by approximately $54.0 million. The recorded liability is based on management estimates of future development and tap fees; actual outcomes could differ materially. Imputed interest expense was $1.71 million for six months and is noncash.
- Pure Cycle and Rangeview Metropolitan District sued the Colorado Land Board, alleging breach of agreements related to the company’s claimed exclusive right to provide water to the Lowry Range. HP A&M separately sued Pure Cycle, alleging breaches of representations in the Arkansas River Agreement related to the dispute. The filing does not quantify potential damages or provide a clear estimate of the outcome.
- HP A&M’s third-party notes secured by properties acquired by Pure Cycle totaled $9.5 million, with $5.5 million in balloon payments due within twelve months. Pure Cycle did not assume the notes, but a default could put properties and associated water rights at risk; management considered default remote and reported no known defaults. The company said it did not have sufficient funds to cure all notes if necessary.
- Customer concentration is substantial: the District accounted for 91% of water and wastewater revenue for six months, and the District’s largest end customer accounted for 71%. The company also identified housing and economic cycles, future tap fees, water-rights diligence requirements, financing availability and litigation outcomes as risks.
- The statements and MD&A report oil-and-gas lease income of approximately $103,600 for the quarter and $207,200 for six months; a note gives different amounts. The filing text does not clearly reconcile this difference.
Important facts for investors to verify
- Whether the company’s working capital and potential shelf-stock issuance can support operations and planned water-asset development.
- The assumptions behind the $66.6 million Tap Participation Fee liability, including projected tap sales, tap-fee growth and the 5.3% imputed interest rate.
- Developments and potential financial effects of the Land Board and HP A&M lawsuits, and the status of HP A&M’s secured notes.
- Customer concentration and the effect of reduced water use, wastewater billing changes and elevated water-delivery costs on future margins.
- The difference between oil-and-gas lease income amounts reported in the financial statements/MD&A and in the notes.